Akamai Beats, Outlook Disappoints - Analyst Blog

Akamai Technologies (AKAM) beat the Zacks Consensus expectation of $233.0 million in revenue and 35 cents in adjusted (normalized) earnings for the fourth quarter of 2009. The company reported $238.3 million in revenue and 46 cents a share in earnings.

Despite a difficult consumer spending environment, growth was observed in the in-digital media and e-commerce space, driven by holiday traffic and traction from high-margin value-added solutions, particularly, application performance solutions. Further, Akamai witnessed strength in software distribution and cloud computing initiatives and had a decent advertising revenue growth in the quarter.

Revenue

The Dec quarter was the largest revenue quarter in the company’s history and Akamai returned to double-digit top line growth in the quarter. Revenue of $238.3 million grew 15.4% from the previous quarter and 12.1% from the year-ago period. Revenue exceeded the company’s own guidance.

Revenue increased due to growth in all the verticals, particularly the e-commerce business which increased 21%, while revenue from the media and entertainment vertical grew 4% year over year, driven by healthy volume growth during the quarter. The high tech vertical also performed well, growing 13% on a year-over-year basis due to a higher volume of software downloads, as well as increased traction from application performance solutions. The public sector vertical grew 31% year over year in the quarter.

Revenue outside North America grew 3% from the prior-year quarter, while International revenue grew 26% year over year. Foreign exchange had a positive impact on the quarterly results.

Revenue grew as an increased number of customers signed up for Akamai’s Web traffic services. New contract signings in the quarter were very encouraging and stood at over 200 this quarter. Customer churn was about 4.0% for the fourth quarter, resulting in 91 net new customers in the quarter to a record 3,122, a 9% increase year-over-year. ARPU (average per revenue per user) was $25,600 for the quarter, up 13% sequentially and up 5% year-over-year.

Operating Performance

Higher year-over-year revenue was offset by higher operating expenses in the quarter. Operating expenses increased 16.4% sequentially and 14.9% year over year in the quarter.

Excluding one-time charges, non-GAAP (normalized) earnings per share of 46 cents increased 21% from 38 cents in the previous quarter and 4.5% from 36 cents in the year-ago quarter. Earnings were 3 cents above the high-end of the guidance range. Adjusted EBITDA for the quarter was a record $111.6 million, up 11% from the same period last year and up 16% from the prior quarter.

Strong top-line growth enabled the company to maintain its cash gross margins of 82.0% for the tenth consecutive quarter.

Akamai’s balance sheet remained strong with $1.1 billion in cash and marketable securities, having generated $124.9 million cash from operations in the quarter, a record. Akamai repurchased 650,000 shares for $15 million in the quarter.

Akamai is facing growing competition and pricing pressure, as new competitors including AT&T Inc. (T) and Level 3 Communications (LVLT) enter the market joining traditional players like Limelight Network (LLNW).

Guidance and Estimates

Despite good fourth-quarter results, shares tumbled 4.87% after hours, primarily because of the company’s cautious revenue guidance for the upcoming quarter. First quarter revenue is expected in the $224.0 million to $233.0 million range, which represents a year-over-year growth of 6% to 11%, but a 4% decline from the fourth quarter at the midpoint. Currency headwinds are expected to have a $2 million negative impact on the first quarter revenue on a sequential basis. Management does not expect to deliver continued double digit top-line growth in 2010.

Normalized earnings per share are expected in the range of 30 cents to 32 cents in the quarter. GAAP gross margins are expected to decline by about a point from the fourth quarter level while cash gross margin is expected to remain flat. Adjusted EBITDA margins are expected to decline by about a point due to lower sequential revenues.

The current Zacks Consensus Estimate calls for 28 cents per share in earnings for the first quarter. Recent revisions to the first quarter estimate have been in both directions. Of the 23 analysts covering the stock, 1 has raised while 2 have lowered their estimates in the last 30 days.

With respect to earnings surprises, Akamai recorded an average earnings surprise of 10.86% in the last four quarters (meaning that it beat the Zacks Consensus Estimate by 10.86% over the year-ago period). The last quarter (third quarter 2009) is of special mention as the company recorded a 10.7% in earnings surprise.

But, in our view Akamai is not expected to repeat its history of positive surprises in the upcoming quarter. The current Zacks Consensus Estimate for the first quarter 2010 is 28 cents with a negative surprise possibility of about 7.14%.

For full year 2010, the earnings estimate is $1.19 with a 10.92% potential negative downside. This is a 28.7% decline from $1.67 per share in earnings reported in 2009. We believe that the weak revenue guidance will call for further negative revisions over the next 30 days, resulting in downward price movement.

We have a Neutral recommendation on the stock.